Untethered by Ian Foley
This new cartoon illustrates that the systematic risk of stablecoins might not be limited to those with algorithmic pegs.
This month saw Terra, once the third largest stablecoin, lose its dollar peg, falling to $0.0001 at the time of writing. Industry insiders suggest that the main reason for this is that rather than keeping reserves, the Terra coin relied on algorithms, which made it susceptible to massive withdrawals from a sister asset called Anchor.
However, the deeper problem is that other stablecoins with reserves tied to real assets (e.g. treasury notes, bonds and commercial paper) are a potential danger to the overall economy.
According to ratings agency Fitch, if Tether needed to quickly sell its holdings to support its dollar peg, it could cause a ‘financial run’ that might impact the short-term credit market.
Robert Armstrong, the author of the Unhedged newsletter, writes: “Stablecoins have a total market capitalization of more than $150 billion. If the pegs all break – and they could – there will be ripples well beyond crypto.”
You can find more of Ian’s cartoons here.